Opinion - World Economy

The US has nothing to gain from a protracted trade dispute with China

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Key Points
  • America's economic growth would be well served if Washington focused on a quick rebalancing of U.S.-China trade accounts.
  • U.S. attempts to reach a comprehensive trade deal by interfering in China’s sovereign domains of economic legislation under threat of discretionary sanctions are unacceptable to Beijing.
  • Washington can protect its economy from illegal and unfair trade behavior by applying its existing trade legislation and strict reciprocity principles.
Chinese President Xi Jinping waves to the press as he walks with President Donald Trump at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.
Jim Watson | AFP | Getty Images

China has done very well on its U.S. goods trade while the two countries led their trade talks over nearly three years to apparently irreconcilable negotiating positions.

Between January 2017 and July 2019, Beijing has pocketed $994.6 billion in net trade income on its U.S. exports sales of $1.3 trillion.

Since the beginning of this year, China seems to have decided to reverse the decades-old trend of rising exports and trade surpluses with the U.S. As a result, during the January to July interval, China's U.S. exports and trade surplus were brought down 12.3% and 10.3%, respectively, from the same period of 2018.

That was a good decision, but a very modest decline of China's surplus because its imports of U.S. goods, during that period, were slashed 18.2%.

A much more constructive action to rebalance trade accounts would have been a sharp increase in China's imports from the U.S. That would have allowed China to achieve a bigger decline in its trade surplus with a relatively smaller weakening of its export sales to America.

Focus on trade accounts

But that's now water under the bridge. Moving on, Washington and Beijing may wish to consider a new approach to their respective negotiating positions.

Both countries should step away from trade warfare and focus on a rapid correction of a hugely unbalanced U.S.-China trade.

The time horizon, the dynamics and the method of trade adjustment are matters of mutual agreement.

But one thing should be clear: Given an unacceptably large U.S. trade deficit with China, and a mutual interest in preserving a constructive trade relationship, imbalances should be reduced by China's declining exports to the U.S. and America's vigorously rising sales to China.

While doing that, explicit trade and political linkages must be avoided to keep a firm focus on a prompt and steady rebalancing of bilateral trade flows.

Once that objective is achieved, the two sides will be able to better address other areas of their bilateral and multilateral relationship.

Wishful thinking? Perhaps.

But pretending to run down America's annual trade losses to China — which amount to hundreds of billions of dollars a year — by bludgeoning Beijing with import tariffs and assaults on its sovereign domains, has damaged the U.S. economy. It has also produced a dangerous standoff with a fiercely hostile nuclear-armed adversary.

Diplomacy, underpinned by Washington's formidable economic and legal instruments, is a much better way to serve American and global trade interests.

A prompt and a meaningful decline of U.S. trade deficits with China is an urgent matter of economic policy and national security. Those deficits are subtractions from American economic growth, they are killing output and employment in American import-competing industries, and they are raising America's $10 trillion in net foreign debt.

US has tools to protect trade

Moving forward, Washington would do well to reconsider its requests for China's specific legal measures on intellectual property protection and outlawing forcible technology transfers to Chinese firms.

Illegal industry subsidies, currency manipulations for trade advantage and problems of market access in China are also part of American complaints. The U.S. is asking that all those policy changes be covered by an enforcement mechanism allowing American discretionary sanctions in cases of non-compliance.

China keeps denying the validity of American trade complaints, signaling that requests for regulatory changes under a permanent threat of U.S. sanctions are unacceptable.

Hence the stalemate, where it serves no purpose to insist on a comprehensive trade agreement that China will not accept. The doomed negotiating process is dragging out, and America continues to lose sales to the world's largest and rapidly developing market.

The way out for Washington is to simply deal with issues of intellectual property, forced technology transfers and illegal industry subsidies by applying the American trade regulation, which includes countervailing duties, import tariffs and quotas, and trade sanctions.

Apart from that, alleged problems of market access for American companies in China are easily dealt with on the basis of strictly applied rules of reciprocity.

U.S. charges of China's currency manipulation for trade advantage are technically impossible to prove. Changes in currency's relative prices are caused by money supply variations — a legitimate policy tool — and they can literally show anything depending on time frames and price deflators.

So, leave the currencies alone and let the markets rip at inappropriate monetary policies.

Will that work? Of course it will. Remember what happened recently to Huawei and other Chinese companies when the U.S. decided to use sanctions and cutoffs from technological supply chains.

That's the strategic competition that China understands and wishes to avoid, because it is impossible to circumvent an overwhelming advantage America has in the world's current economic, financial and security infrastructure.

Washington, however, has to know how far not to go too far, because it has no constituency among its friends and allies to isolate and contain China.

Saudi Arabia is the latest case in point. It is a country that maintains a "comprehensive strategic partnership" with China and participates in China-sponsored Belt & Road projects. And while the U.S. rushes to beef up the Saudi defenses, King Salman bin Abdulaziz Al Saud talked on the phone last Friday with China's President Xi Jinping about the attack on Saudi oil facilities, emphasizing his firm adherence to the "one-China principle" and support for issues that involve China's core interests.

Investment thoughts

America's economic growth would be well served if Washington focused on a quick rebalancing of U.S.-China trade accounts.

U.S. attempts to reach a comprehensive trade deal by interfering in China's sovereign domains of economic legislation under threat of discretionary sanctions are unacceptable to Beijing. Any such administrative changes in China will come about under market pressures, reciprocal trade practices and annual reviews of China's economy and trade activities by official international organizations such as the International Monetary Fund, the Organisation for Economic Co-operation and Development and World Trade Organization.

Meanwhile, Washington can protect its economy from illegal and unfair trade behavior by applying its existing trade regulations and strict reciprocity principles.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

—Correction: This article has been updated to correct an editing error that inaccurately characterized the United States' annual trade losses to China.